Abstract
Although Bitcoin was intended to be a decentralized digital currency, in practice, mining power is quite concentrated. This fact is a persistent source of concern for the Bitcoin community.
We provide an explanation using a simple model to capture miners' incentives to invest in equipment. In our model, n miners compete for a prize of fixed size. Each miner chooses an investment q_i, incurring cost c_i q_i, and then receives reward (q_i^alpha)/(sum_j q_j^alpha), for some alpha >= 1. When c_i = c_j for all i,j, and alpha = 1, there is a unique equilibrium where all miners invest equally. However, we prove that under seemingly mild deviations from this model, equilibrium outcomes become drastically more centralized. In particular,
 When costs are asymmetric, if miner i chooses to invest, then miner j has market share at least 1c_j/c_i. That is, if miner j has costs that are (e.g.) 20% lower than those of miner i, then miner j must control at least 20% of the total mining power.
 In the presence of economies of scale (alpha > 1), every market participant has a market share of at least 11/(alpha), implying that the market features at most alpha/(alpha  1) miners in total.
We discuss the implications of our results for the future design of cryptocurrencies. In particular, our work further motivates the study of protocols that minimize "orphaned" blocks, proofofstake protocols, and incentive compatible protocols.
BibTeX  Entry
@InProceedings{arnosti_et_al:LIPIcs:2018:10098,
author = {Nick Arnosti and S. Matthew Weinberg},
title = {{Bitcoin: A Natural Oligopoly}},
booktitle = {10th Innovations in Theoretical Computer Science Conference (ITCS 2019)},
pages = {5:15:1},
series = {Leibniz International Proceedings in Informatics (LIPIcs)},
ISBN = {9783959770958},
ISSN = {18688969},
year = {2018},
volume = {124},
editor = {Avrim Blum},
publisher = {Schloss DagstuhlLeibnizZentrum fuer Informatik},
address = {Dagstuhl, Germany},
URL = {http://drops.dagstuhl.de/opus/volltexte/2018/10098},
URN = {urn:nbn:de:0030drops100989},
doi = {10.4230/LIPIcs.ITCS.2019.5},
annote = {Keywords: Bitcoin, Cryptocurrencies, RentSeeking Competition}
}
Keywords: 

Bitcoin, Cryptocurrencies, RentSeeking Competition 
Collection: 

10th Innovations in Theoretical Computer Science Conference (ITCS 2019) 
Issue Date: 

2018 
Date of publication: 

08.01.2019 